Hospital consolidation proves relentless across the state

 In May 2018

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The great health care merger between UNC Health Care and Carolinas HealthCare System (now the geographically neutral Atrium Health) is history. The two sides couldn’t come to terms. But one strand of the deal lives on: UNC is finalizing plans to sell High Point Regional Health System to Wake Forest Baptist Medical Center.

What’s the price? Wake Forest Baptist won’t say. UNC says disclosing the price it (meaning North Carolina taxpayers) will receive for the 351-bed hospital and related infrastructure would reveal confidential health care information. That is a different stance than with its takeover of High Point in 2013, when UNC was eager to disclose the terms: the creation of a $50 million foundation and $150 million in capital improvements.

So much of business comes down to trying to figure out the value of an asset. Does it save money? Does it make money? What’s the intangible or strategic long-term value? On and on it goes. This whole valuation thing can be easy with a Subway franchise or an NFL team.

But public and not-for-profit hospitals are different beasts. First, they’re not organized specifically to make money. So, trying to figure out a price based on cash flow or earnings can be dicey. Second, it’s not always clear to whom the buyer makes the check out. Nonprofit hospital corporations don’t have shareholders in the conventional sense. Buyers and sellers have to be creative in terms of payment. Hence the community foundations and capital improvements and, in the case of municipal hospitals, payments straight to the government coffers.

That brings us to Mission Health, which is being sold to Nashville-based HCA Healthcare Inc., the nation’s largest hospital management company. It will be a first for North Carolina, where to date all the major hospitals have been run by universities or not-for-profits. No terms have been announced, but Mission CEO Ronald Paulus said HCA will provide more than $1 billion to endow a community health foundation to serve residents of western North Carolina.

HCA rarely buys nonprofits. But Mission, with hospitals across western North Carolina, is a crown jewel. It has a well-protected fortress in Asheville, a community attractive enough to lure both great doctors a nd the rich people who will pay for their services. It is big, with revenue of $1.7 billion, and its main unit, Mission Hospital, had revenue exceeding costs by a nearly 9% in 2016.

High Point, by contrast, just breaks even, according to its filings. From a financial standpoint, it’s at best a diamond in the rough, and it will be up to Wake Forest to figure out whether there is more diamond or just more rough to be found. Some of that is no doubt due to fierce competition with Cone Health and Novant Health, among others.

Despite the collapse of the UNC-Atrium deal, there will be more consolidation coming to North Carolina’s hospital landscape. HCA’s arrival changes the game. It has $44 billion in annual revenue and a market capitalization of nearly $34 billion. Compare that with LifePoint Health, Duke University’s for-profit partner, which has about 10% of HCA’s revenue and 5% of its market cap. Simply put, HCA has deeper pockets than its peers. It can pay more to cut deals, and, as a bonus to communities, when the ink dries, the hospitals it takes over become tax-paying entities. For-profits will play a larger role. I don’t think that’s a bad thing. The days when there was a bright line between for- and not-for-profit hospitals are over.

This isn’t to suggest that in 10 years, HCA will have gobbled up the remaining independent hospitals in North Carolina. It doesn’t want all of them. Just the good ones. It’s a business that wants to make money. Yes, it also wants to make sick people better. But like the not-for-profits it now competes with, it adheres to the old saying, “Before you can do good, you have to do well.”

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